Unlike the equal-weighted S&P 500, the capitalization-weighted S&P 500 index has been prone to over-representation in certain sectors, namely technology in the late 1990s, and financial and energy stocks circa 2007-2008. This is important for today’s S&P 500 index investors because technology has once again gained supremacy in the index, composing more than one-fourth of its value. This poses a bit of an inflation risk to indexers as, historically, technology shares have been the most negatively affected by commodity price increases (via SPDJ):
As I have warned before, indexing alone does not provide sufficient diversification, and investors would do well to look at ways to balance out the exposures their indexing strategies imply as it seems unrealistic to assume that cost-push inflation will continue to be as benign as it has been during the current bull market.
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